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Hopes for an agreement to end the war brightens the markets

Hopes for an agreement to end the war brightens the markets

The improved risk sentiment noticed during the trading session on Tuesday was still present and even increased throughout yesterday.

The reasons for this sudden change do not seem to be very solid yet and seem to rely only on the hopes that the two parties will reach an agreement. President Zelensky’s latest statements fuel these hopes. Everything is open, and the latest actions do not indicate that the end of the confrontation could be anywhere near.

But the market is hungry for good news and as usual, likes to anticipate how things will unfold. The best of all is that it is right on many occasions.

In this scenario of market relaxation, oil corrected downwards by more than $14 from the previous day's close, the biggest daily drop since last November. This news came despite yesterday's announcement from the United States regarding cutting crude oil imports from Russia. At the same time, the UAE insisted that OPEC increases production, and Iraq officials said the country had some extra reserve capacity.

But the most impressive performance was for DAX. The German index rose over 7% during the session, the highest daily rise in many years, leaving a very favorable technical scenario as it strongly rejected the support level of 13240. The European Union's decision to try and free itself from the energy dependency on Russia and allocating a budget to develop this ambitious project is undoubtedly a key reason behind this recovery.

Today the European Central Bank is meeting, and analysts don’t believe it will change anything relevant on monetary policy. Most probably, it will not even insist this time on tightening monetary policy due to the worsening of growth expectations due to the conflict in Ukraine. However, inflation will continue to rise due to this same reason.

Should this happen, the euro, which has recovered from lows close to 1.0820 to levels close to 1.1100, largely due to the market's return to greater risk appetite, could again be pressured downwards. An additional pressure element for the EU's single currency could be the US inflation figure published today. If it rises above market expectations again, as has already been hinted at from the White House, it will add further pressure to the Federal Reserve to raise rates.

Sources: Bloomberg, Reuters.

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